Servicers Must Grapple with Katrina Questions

In addition to the human toll they exacted, Hurricanes Katrina and Rita, to a lesser extent, have left behind a storm of issues for mortgage servicers in their wake. While servicers are still in the process of assessing the damage to properties in their portfolios, they are also facing a few other complications. Is the insurance assessment going to be on the basis of flood or wind? In the meantime, in the case of securitized loans, how long are they going to be advancing principal and interest on the loans? Is there adequate flood insurance on the properties? And what about the mold issues? So how are they handling the situation?

Robert Vestewig, chief operating officer, GEMSA Loan Services, Houston, told Commercial Servicer that their initial effort has been focused on contacting all properties in their database that might have been affected within the Federal Emergency Management Agency's list of impacted ZIP codes and determining the extent of the damage. They have set up a task force of insurance people and GEMSA portfolio managers and are contacting property owners and managers. Their goal is to make sure that insurers realize that there are lenders who have a right to the money. In terms of the impact on delinquencies and transfers to special servicing, Mr. Vestewig speculates that any impact is going to start with the October payments or later, since as of Sept. 1, it was still uncertain what was going on with Katrina and a lot of borrowers already sent in their payments. "So to the extent that there is going to be a request for forbearance or deferrals, I expect that is going to start more with the October payments or later, depending upon rent insurance and other things that might be available," Mr. Vestewig noted.

In situations where servicers might be required to advance principal and interest on loans to meet the demands of securitization, he expects that the advancing is going to be higher in October and November. In the case of portfolio loans, lenders are going to consider each loan on a case-by-case basis, evaluate the availability of insurance proceeds and how long it is likely to take to restore the property and make a decision. While some insurers or lenders will take the money and pay the loan down, more of them are likely to use the money to rebuild, he expects.

"I think that in the commercial mortgage-backed securities world, the payments need to be made, there is not a whole lot of flexibility. The portfolio lenders have more flexibility," he said.

What strikes him as unusual about the whole situation is that not only have buildings been damaged, but tenants have also been evacuated and it is not clear when they are coming back, which means that even if a property is standing, the owners may not get any revenue. "Usually the question is whether the building is there or not, but what if the population is not there? It is a little hard to evaluate the overall effect of the storms. It is not just limited to what was damaged and what was not damaged. There are going to be some broader economic dislocations that are going to have some effects, too," he observed.

Rich Carlson, a director with Fitch's CMBS group, said that it is still unclear how insurance claims are going to be handled. He added, "Having gone through the terrorism insurance thrill, servicers are well prepared and have experienced insurance professionals on staff to be able to do that." He hasn't seen a lot of transfers to special servicing, but believes that October payments might be the ones that start showing up any delinquency effect. "Some of the payments had already been made for the previous month, or rents had already been collected, so funds were available, but if you don't have tenants paying rents, it will be interesting to see what will happen," he said.

Fitch's reading of CMBS delinquencies for September showed a decline in delinquencies to a low of 0.95%. However, the rating agency expects the Katrina effect to start showing up in future readings, considering that Fitch uses a minimum 60-day delinquent criterion for inclusion in their study. The rating agency believes that the lower September delinquency rate is because borrowers use Automated Clearing House withdrawals to submit mortgage payments. Many CMBS borrowers in the Gulf Coast area already had the September payments in their accounts, which would have had the effect of delaying any immediate increase in delinquencies.